Infographics: The World's Most Famous Case of Deflation: The Great Depression Part 1

A glimpse of the deflationary epoch known as the Great Depression via the infographics provided by the Visual Capitalist

The Great Depression was the most severe economic depression ever experienced by the Western world.

It was during this troubled time that the world’s most famous case of deflation also happened. The resulting aftermath was so bad that economic policy since has been chiefly designed to prevent deflation at all costs. 

Setting the Stage 

The transition from wartime to peacetime created a bumpy economic road after World War I.

Growth has hard to come by in the first years after the war, and by 1920-21 the economy fell into a brief deflationary depression. Prices dropped -18%, and unemployment jumped up to 11.7% in 1921.

However, the troubles wouldn’t last. During the “Roaring Twenties”, economic growth picked up as the new technologies like the automobile, household appliances, and other mass-produced products led to a vibrant consumer culture and growth in the economy.

More than half of the automobiles in the nation were sold on credit by the end of the 1920s. Consumer debt more than doubled during the decade.

While GDP growth during this period was extremely strong, the Roaring Twenties also had a dark side. Income inequality during this era was the highest in American history. By 1929, the income of the top 1% had increased by 75%. Income for the rest of people (99%) increased by only 9%.

The Roaring Twenties ended with a bang. On Black Thursday (Oct 24, 1929), the Dow Jones Industrial Average plunged 11% at the open in very heavy volume, precipitating the Wall Street crash of 1929 and the subsequent Great Depression of the 1930s. 

The Cause of the Great Depression 

Economists continue to debate to this day on the cause of the Great Depression. Here’s perspectives from three different economic schools: 

Keynesian: 

John Maynard Keynes saw the causes of the Great Depression hinge upon a lack of aggregate demand. This later became the subject of his most influential work, The General Theory of Employment, Interest, and Money, which was published in 1936.

Keynes argued that the solution was to stimulate the economy through some combination of two approaches:

1. A reduction in interest rates (monetary policy), and

2. Government investment in infrastructure (fiscal policy).

“The difficulty lies not so much in developing new ideas as in escaping from old ones.” – John Maynard Keynes 

Monetarist: 

Monetarists such as Milton Friedman viewed the cause of the Great Depression as a fall in the money supply.

Friedman and Schwartz argue that people wanted to hold more money than the Federal Reserve was supplying. As a result, people hoarded money by consuming less. This caused a contraction in employment and production since prices were not flexible enough to immediately fall.

“The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.” ― Milton Friedman 

Austrian: 

Austrian economists argue that the Great Depression was the inevitable outcome of the monetary policies of the Federal Reserve during the 1920s.

In their opinion, the central bank’s policy was an “easy credit policy” which led to an unsustainable credit-driven boom.

“Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.” – Murray Rothbard 

The Great Depression and Deflation 

Between 1929 and 1932, worldwide GDP fell by an estimated 15%.

Deflation hit.

Personal income, tax revenue, profits and prices plunged. International trade fell by more than 50%. Unemployment in the U.S. rose to 25% and in some countries rose as high as 33%.

Part 2 coming

Courtesy of: The Money Project

Infographics: How the Fintech (Financial Technology) Industry Performed in 2015

The "Third Wave" generation or the information age has spawned and will give birth to various new industries. 

Part of this has been the the Financial Technology (FinTech) industry.

Financial Technology, according to Wikipedia, are the "line of business based on using software to provide financial services". Additionally, the the technology heavy companies "are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software".

In short, Fintech industries have emerged to challenge incumbent institutions established by the industrial revolution.

What distinguishes the "information age" as against the "industrial revolution" has been the "decentralized" platforms enabled by digital technology relative to the latter's "centralized" (top-down) institutions.

2015 have been a great year for the Fintech. Below is an infographic of the state of the Fintech in 2015. 

As an aside: disclosure: I do not have exposure yet on Fintech.

The SavvyBeaver writes,

Financial technology or FinTech is an integral part of the global economy. It's what processes transactions, helps us monitor the markets, and keeps the banks ticking. In recent years this kind of technology has rapidly evolved with the advent of mobile banking, cryptocurrencies like Bitcoin, and the general rise of financial apps. There's no telling where it will take us in the future, but if the current stats are anything to go by GROWTH is the word.

A new infographic from SavvyBeaver Canada and startup Call Levels takes a closer look at the current financial technology landscape.

Its exponential growth can be clearly seen from the investment side. From 2013 to 2014, global investment in FinTech jumped from $3 billion to over $12 billion - a 400 percent increase. When the full data from 2015 is in, it's expected to have reached a staggering $40 billion!

Payment and lending solutions make up 40% of all investment, but blockchain technology (popularized by Bitcoin) and Cloud-based services are also heavily backed.

Unsurprisingly the United States is the largest investor, followed by Europe and then Asia. Giants like Citigroup, JP Morgan and Goldman Sachs are all pumping millions in to the industry, alongside individual entrepreneurs like Marc Andreessen of Netscape and Reid Hoffman of LinkedIn. The general public are also increasingly investing, with stocks in Paypal and P2P lending platform Lending Club, leading the pack.

The majority of FinTech startups are also born out of the US, from tech hubs like Silicon Valley, New York and Boston. Collectively these account for roughly 4.7 million companies. India is next with 1.92 million FinTech startups and the UK accounts for 820,000, most of which are developed in London.

The top 5 Unicorns of 2015 (I.e. startups that have been valued over $1 billion), include mobile payment processor Square Inc ($6B), online payment processor Stripe ($3.5B), eCommerce and mCommerce technology company Powa ($2.7B), P2P lending platform Prosper ($1.9B), and outsourced payment processor Adyen ($1.5B).

Quite clearly the current demand is for efficient online and mobile payment processing solutions, which is just a reflection of how society wants to do business. Whether it's the local plumber wanting to accept digital payments instead of cash or a giant corporation wanting to include Bitcoin as a payment option, FinTech is helping us get there.

Meanwhile the top FinTech acquisitions of 2015 include the sale of bank software provider SunGard to FIS for $9.1B, DH Corporation acquired bank payment solution provider Fundtech for $1.25B, and digital payments business Skrill acquired online payment provider Optimal Payments for $1.2B.

What drives FinTech is innovation and efficiency. Simply put people want to be able to access financial services quickly, easily, on the go and for a cheaper price than traditional services. Even relatively new technologies like contactless credit cards are already being challenged by apps like Google Wallet that lets you do the same thing but with your phone instead. One less item to carry and extra security.

Other apps currently in the limelight include Call Levels itself, which allows you to monitor markets like equities and Bitcoin and receive alerts when there's a move you need to know about. Venmo is a digital wallet that allows you to send money instantly between friends and family for free, and you can fund the transaction with credit cards and bank accounts. On a larger scale it could easily rival Paypal.

Quite what the future holds isn't clear but FinTech advocate Michael Spencer believes the public are going to become far more educated in managing their assets and finances because of the apps themselves. He and other analysts like Chris Skinner are also predicting that some of us could end up doing our banking through Facebook.

Made by: SavvyBeaverCA

Infographics: The World’s Most Famous Case of Hyperinflation: Weimar Germany (Part 1 & 2)

The World’s Most Famous Case of Hyperinflation (Part 1)

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

From the Money Project/Visual Capitalist

The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect. 

Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.

The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.

The Treaty of Versailles

Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.

The terms of the agreement, which were essentially forced upon Germany, made the country:

1. Accept blame for the war

2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)

3. Forfeit territory in Europe as well as its colonies

4. Forbid Germany to have submarines or an air force, as well as a limited army and navy

5. Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.

“I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.” – John Maynard Keynes, representative of the British Treasury

Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.

The Catalysts

1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.

This created two separate versions of the same currency:

Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks

Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.

In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.

2. Heavy Debt

Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.

Adding together previous debts with the reparations, debt exceeded Germany’s GDP.

3. Inability to Pay

The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.

Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.

Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.

Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.

4. Invasion of The Ruhr 

After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.

French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.

German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone. 

On top of that, more and more banknotes had to be printed to pay striking workers.

Hyperinflation

Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.

All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished. Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2. 

Courtesy of: The Money Project

Part 2

Again from the Money Project/Visual Capitalist

Slippery Slope

“Inflation took the basic law-and-order principles of loyalty and trust to the extreme.” Martin Geyer, Historian. 

“As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans.” Karl Helfferich, an economist in 1915.

“There is a point at which printing money affects purchasing power by causing inflation.” Eduard Bernstein, socialist in 1918.

In the two years past World War I, the German government added to the monetary base of the Papiermark by printing money. Economic historian Carl-Ludwig Holtfrerich said that the “lubricant of inflation” helped breathe new life into the private sector.

The mark was trading for a low value against the dollar, sterling and the French franc and this helped to boost exports. Industrial output increased by 20% a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly.

Then, suddenly this “lubricant” turned into a slippery slope: at its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours.

When did the “lubricant” of inflation turn into a toxic hyperinflationary spiral?

The ultimate trigger for German hyperinflation was the loss of trust in the government’s policy and debt. Foreign markets refused to buy German debt or Papiermarks, the exchange rate depreciated, and the rate of inflation accelerated.

The Effects

Hyperinflation in Germany left millions of hard-working savers with nothing left.

Over the course of months, what was enough money to start a stable retirement fund was no longer enough to buy even a loaf of bread.

Who was affected?

-The middle class – or Mittelstand – saw the value of their cash savings wiped out before their eyes.

-Wealth was transferred from general public to the government, which issued the money.

-Borrowers gained at the expense of lenders.

-Renters gained at the expense of property owners (In Germany’s case, rent ceilings did not keep pace with general price levels)

-The efficiency of the economy suffered, as people preferred to barter.

-People preferred to hold onto hard assets (commodities, gold, land) rather than paper money, which continually lost value.

Stories of Hyperinflation

During the peak of hyperinflation, workers were often paid twice a day. Workers would shop at midday to make sure their money didn’t lose more value. People burned paper bills in the stove, as they were cheaper than wood or other fuel.

Here some of the stories of ordinary Germans during the world’s most famous case of hyperinflation.

“The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week,” Eugeni Xammar, a journalist, wrote in February 1923. “As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling.”

A man who drank two cups of coffee at 5,000 marks each was presented with a bill for 14,000 marks. When he asked about the large bill, he was told he should have ordered the coffees at the same time because the price had gone up in between cups.

A young couple took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.

Historian Golo Mann wrote: “The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath,” he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. “What was there to trust, who could you rely on if such were even possible?” he asked.

Even Worse Cases of Hyperinflation

While the German hyperinflation from 1921-1924 is the most known – it was not the worst episode in history.

In mid-1946, prices in Hungary doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

Peak Inflation Rates:

Germany (1923): 3.5 billion percent

Zimbabwe (2008): 79.6 billion percent

Hungary (1946): 41.9 quintillion percent

Hyperinflation has been surprisingly common in the 20th century, happening many dozens of times throughout the world. It continues to happen even today in countries such as Venezuela.

What would become of Germany after its bout of hyperinflation?

A young man named Adolf Hitler began to grow angry that innocent Germans were starving…

“We are opposed to swarms of Americans and other foreigners raising prices throughout Germany while millions of Germans are starving because of the increased prices. We are equally opposed to German profiteers and we are demanding that all be imprisoned.” – Adolf Hitler, 1923, Chicago Tribune

Courtesy of: The Money Project

Infographics: Keynesian Economics 101

If one should wonder why the scourge of boom busts cycles and its attendant crises (economic, financial, currency and debt), as well as accounts of hyperinflation, continually afflicts society, then look no further than to the economic dogma that has provided justification for their existence.

The Austrian Insider (hat tip Mises Blog and Zero Hedge) on the 4 Simple Lessons of Keynesian economics

Since Keynesian economics has reined supreme among mainstream economists for decades, you might want to know some of the basics. If this is confusing to you though, don’t worry about it! There are people in charge who have it all under control.

The great Austrian economist F.A. Hayek on Keynesian economics (from page 349 of Hayek’s The Trend of Economic Thinking, which is Vol. 3 in The Collected Works of F.A. Hayek hat tip Cafe Hayek) [bold added]

It is characteristic of much of recent economics that by ever new arguments it has tried to vindicate those very prejudices which are so attractive because the maxims that follow from them are so pleasant or convenient: spending is a good thing, and saving is bad; waste benefits and economy harms the mass of the people; money will do more good in the hands of the government than in those of the people; it is the duty of government to see that everybody gets what he deserves; and so on.)

Why Keynesian economics have popular with politicians and why it signifies as societal disease. From Austrian economist Peter Boettke (bold added)  

Keynesianism is not a panacea because Keynesianism has dominated public policy making for half a century and has left us in such a state of public debt. Keynesianism broke the old time fiscal religion of balanced budgets and fiscal responsibility, and changed not only attitudes of economists and policy makers, but also eroded whatever institutional constraints existed on public spending that had existed. Keynesianism cannot work to solve our current problems because Keynesianism is responsible for our current problems. Keynesianism provided an illusion of short term prosperity, but the reality of long term stagnation. Of course, the revealing of the illusion can be put off, as I have pointed out before, if there is the discovery of new opportunities for gains from trade, and/or gains from innovation.

But the governmental habit of spending is still there and the bill has to be paid as some point. Keynesianism is a disease on the body politic because it caters to the natural propensity of politicians to focus on short run, and to concentrate benefits and disperse costs.

Infographics: Bitcoin Was The Top Performing Currency in 2015

The Visual Capitalist writes:

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

For most investors, the major story of 2015 was the expectation and eventual fulfillment of a rate hike, signalling the start of tightening monetary policy in the United States. This policy is divergent to those of other major central banks, and this has translated into considerable strength and momentum for the U.S. dollar.

Using the benchmark of the U.S. Dollar Index, a comparison against a basket of major currencies, the dollar gained 8.3% throughout the year.

Despite this strength, the best performing currency in 2015 was not the dollar. In fact, the top currency of 2015 is likely to be considered the furthest thing from the greenback.

Bitcoin, a digital and decentralized cryptocurrency, staged a late comeback in 2015 to overtake the dollar by a whopping 35% by the end of the year.

Bitcoin is no stranger to extremes. During the year it came into the mainstream in 2013, Bitcoin gained 5,429% to easily surpass all other currencies in gains. However, the following year it would become a dog, losing -56% of its value to become the world’s worst performing currency in 2014.

The second best performing major currency, relative to the USD, was the Israeli shekel. It gained 0.3% throughout the year, and the Japanese yen (0%) and Swiss franc (0%) were close behind, finishing on par with how they started the year.

The world’s worst performing currencies are from countries that were battered by commodities or geopolitical strife.

Ukraine’s hryvnia fell -33.8% in the aftermath of Crimea. Brazil’s real (-30.5%), the Canadian dollar (-15.9%), Russian ruble (-20.8%), and South African rand (-26.7%) all lost significant value in the purging of global commodities. Gold finished the year down -10%, and silver at -11%.

Courtesy of: The Money Project

Infographics: 33 Indicators that Bitcoin is Alive and Well and Will Grow in 2016

The Bargain Fox explains why bitcoins, in spite of present ordeals, hasn't been slowing down and will continue to grow in 2016.

When Satoshi Nakamoto launched Bitcoin in January 2009 it was the beginning of a revolution. The original block in the blockchain was encoded with a bleak snapshot of the failing financial system, a small quote from the UK Times newspaper:  "Chancellor on brink of second bailout for banks." 

It was banks, central control and corrupt government policy, that the fledgling cryptocurrency was hoping to replace. While it has not yet overthrown the financial institutions of old, nearly 7 years on it's still closer to doing so than many people had imagined.

Like all groundbreaking technologies there were technical teething problems, naysayers and outright battles. Some governments tried to outlaw its use (and some have succeeded). The negative PR stemming from the currency's ties to the illegal dark net markets may have scared some people off. And the early adopters were well and truly screwed over when they stored their digital funds in the Mt. Gox exchange, because hundreds of millions of dollars worth went missing.

Yet here were are, closing in on 2016 and bitcoin is alive and well. In fact it's doing better than ever and our new infographic demonstrates that the only way is up, in terms of value and usage.

Indeed the dollar price of BTC has been steadily rising since the start of the year, regaining ground after its first major crash. In just the past 3 months it has doubled its value by a $200 increase and there's no sign of that slowing down as 2016 emerges.

As for the actual trading volume at the exchanges and the overall growth of the exchanges themselves - well both are skyrocketing. From October 2014 to October 2015, OK Coin from Singapore has grown 847%, and even the more western-centric BitStamp has doubled within the year. The market is managing to move $289 million worth of BTC on a daily basis, more than Western Union ($216m) and closing in on PayPal ($397m).

Meanwhile online and offline merchants are increasingly adding bitcoin as a payment method, supported by bitcoin payment service providers such as Coinify, Europe's leader in processing wide range of digital currency payments. Not just to keep customers happy but because it actually costs them less to process. A negligible 1% is charged for BitPay premium members compared to the major credit card networks, which range between 2% and 6%. This has contributed to the jump from 65,000 merchants accepting BTC to 100,000 plus. While we can imagine some scenarios where it isn't beneficial to the customer, retailers like TigerDirect are proud to reveal that bitcoin prevents fraudulent chargebacks which are very common with customers using credit cards.

In short all you really need to know is that giants like Microsoft, Expedia and Time Inc. have embraced BTC and many others are following suit. August 2015 saw BitPay's most successful month, recording 70,000 transactions. 

In turn, as this demand has increased so has the venture capital funding the user-friendly apps, bitcoin ATMs, exchanges, and other technology. In 2012 only $2 million was pumped in to the industry. So far in 2015 this has reached $469 million! 

Perhaps the last remaining concern for the bitcoin revolution is overcoming volatility, the freak fluctuations in value. Thankfully the facts don't lie. As the market has grown the impact of panic and large volume trading has lessened. From 2011 to 2015 the line is quite simply going down. For regular traders who exploit volatility this might not be good, but for those who want a simple electronic currency that is out of the reach of the old monetary guard, then we're on the revolutionary track that Satoshi Nakamoto laid down. 

For 33 indicators that prove the only way is up for Bitcoin, check out our new infographic.

Disclosure: Presently I do not own bitcoins. But sometime in the future, I may test the waters. 

As noted above, bitcoin or cryptocurrencies are in the process of evolving. And bitcoin or cryptocurrencies have been challenged mainly by authorities who see the emergence of online decentralized payment and settlement platform as threat to their monopoly control of central banking fiat money. Nonetheless, cryptocurrencies  will likely play a much bigger role in the coming years.

Made by: BargainFox

Infographics: All of the World’s Money and Markets in One Visualization

An infographic on the estimated stock of the world's money, credit and asset markets from the Visual Capitalist. They write:

All of the World’s Money and Markets in One Visualization

How much money exists in the world?

Strangely enough, there are multiple answers to this question, and the amount of money that exists changes depending on how we define it. The more abstract definition of money we use, the higher the number is.

In this data visualization of the world’s total money supply, we wanted to not only compare the different definitions of money, but to also show powerful context for this information. That’s why we’ve also added in recognizable benchmarks such as the wealth of the richest people in the world, the market capitalizations of the largest publicly-traded companies, the value of all stock markets, and the total of all global debt.

The end result is a hierarchy of information that ranges from some of the smallest markets (Bitcoin = $5 billion, Silver above-ground stock = $14 billion) to the world’s largest markets (Derivatives on a notional contract basis = somewhere in the range of $630 trillion to $1.2 quadrillion).

In between those benchmarks is the total of the world’s money, depending on how it is defined. This includes the global supply of all coinage and banknotes ($5 trillion), the above-ground gold supply ($7.8 trillion), the narrow money supply ($28.6 trillion), and the broad money supply ($80.9 trillion).

All figures are in the equivalent of US dollars.

Courtesy of: The Money Project

A bonus chart from the late economist John Exter with his eponymous Exter's Pyramid

The table represents the proportionality of fiat money/credit/derivatives with gold (chart from goldcore.com)

Infographics: How are Silver and Gold Bullion Premiums Calculated?

A neat infographics to show the basics of silver and gold bullion from the Visual Capitalist 

The price paid for each ounce of bullion is composed of the metal’s spot price and the bullion premium.

Here’s the price composition of some common rounds:

Silver Eagle: 80% spot price / 20% bullion premium

Silver Canadian Maple Leaf: 84% spot price / 16% bullion premium

Gold Eagle: 96% spot price / 4% bullion premium

How are these bullion premiums determined? How can bullion buyers take advantage of the lowest possible premiums?

DIFFERENCE BETWEEN SPOT PRICES AND BULLION PREMIUMS

Spot Price: The current price per ounce exchanged on global commodity markets.

Bullion Premium: The additional price charged for a bullion product over its current spot price.

The calculation for bullion premiums depends on five key factors:

The current bullion market supply and demand factors.

Local, national, and global economic conditions.

The volume of bullion offered or bid upon.

The type of bullion products being sold.

The bullion seller’s objectives.

BULLION SUPPLY AND DEMAND

The total amount of supply and demand of bullion is a major influence on bullion product premiums.

Bullion dealers are businesses, and they are actively trying to balance product inventory and profitability. Too much inventory means high costs. Too little inventory means angry customers. Fluctuations in the gold and silver markets affect bullion market supply, and this impacts premium prices.

For example, in the Western hemisphere during the summer, calmer price patterns mean the bullion supply tends to increase. Sellers mark down their prices to attract market share.

During other months, silver and gold prices tend to have more volatility. This leads to increased buying and selling, and bullion sellers react accordingly. Some may mark up prices to prevent running out of inventory, or to capture profits.

ECONOMIC CONDITIONS

Depending on their size and significance, market events can affect bullion premiums local to global stages.

Examples:

In a small town with only one brick and mortar coin shop, the dealer may boost their premiums to guard against running out of inventory.

In a country like Venezuela, where the local currency is losing value at an extreme rate, locals may opt to buy bullion to preserve their wealth. This means higher premiums.

At a global level, in the event of a large crisis (similar to the 2008 Financial Crisis), it is likely premiums would increase significantly as demand spikes and options diminish.

VOLUMES BEING SOLD

Every seller incurs costs on each transaction such as time, overhead, or payment processing costs. For a seller, a single transaction for 1 oz of gold may have similar transaction costs as a 1000 oz transaction.

Therefore, transactions with higher volumes of bullion have their costs spread out. As a result, premiums tend to be higher on small volume purchases, and lower per oz on high volume buys.

FORM OF BULLION FOR SALE

As a general rule, the larger the piece of bullion is, the less the premium costs are per oz.

It costs a mint far less to make one 100 oz silver bar, vs. 100 rounds of 1 oz each.

There is also typically a significant difference in premiums between government and private mints.

For example the most popular bullion coins in the world are American Silver and Gold Eagle coins. The U.S. Mint charges a minimum of $2 oz over spot for each Silver Eagle coin and +3% over spot for each Gold Eagle coin they strike and sell to the world’s bullion dealer network.

A private company like Sunshine Minting will sell their silver rounds and bars in bulk for less than ½ the premium most government mints will sell their products for.

BULLION SELLER’S OBJECTIVES

Whether the seller is a large bullion dealer or a private individual, they will almost always want to yield the highest ask price they can get for the bullion they are selling.

That said, just because one wants to receive a large premium on the bullion they are selling, that doesn’t necessarily mean the market’s demand or willing buyers will comply.

Dealers must consider these factors when setting premiums:

Market share objectives

Competitor strategies

Price equilibrium strategy

If a dealer sets its price too high, buyers will likely choose to go to a lower priced competitor.

If a dealer sets their price too low, they could end up selling out of inventory without garnering enough profit margin to pay for the company’s overhead costs.

Dealers and sellers are both typically trying to find the price equilibrium “sweet spot” where the time required to complete a sale is minimized and the seller’s profit is maximized.

This is more difficult than it sounds, as there can be thousands of factors at play when establishing the best possible premium to charge in line with one’s overall objectives.

PRICE COMPOSITION FOR BULLION PRODUCTS

When bullion markets are experiencing normal demand, about 80-95% of silver bullion’s price discovery is comprised of the current spot price.

For gold, spot prices approximately comprise of 95-98% of gold bullion’s overall price discovery.

Now for the above presented as infographic...

Courtesy of: Visual Capitalist and JMBullion